Legacy Housing Corporation (NASDAQ:LEGH) Q3 2023 Earnings Call Transcript

Legacy Housing Corporation (NASDAQ:LEGH) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Good day, and thank you for standing by. Welcome to the Legacy Housing Corporation Third Quarter 2023 Earnings Call. At this time, all participants are on a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Duncan Bates. Please go ahead.

Duncan Bates: Good morning. This is Duncan Bates, Legacy’s President and CEO. Thanks for joining our third quarter 2023 conference call. Max Africk, Legacy’s General Counsel, who will read the safe harbor disclosure before getting started. Max?

Max Africk: Thanks, Duncan. Before we begin, may I remind our listeners that management’s prepared remarks today will contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor for forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from management’s current expectations. We, therefore, refer you to a more detailed discussion of the risks and uncertainties in the annual report filed with the Securities and Exchange Commission. In addition, any projections as to the company’s future performance represent management’s estimates as of today’s call. Legacy Housing assumes no obligation to update these projections in the future unless otherwise required by applicable law.

Duncan Bates: Thanks, Max. I’m joined today by Jeff Fiedelman, Legacy’s Chief Financial Officer. Jeff will discuss our third quarter performance, then I will provide additional corporate updates and open the call for Q&A. Jeff?

Jeff Fiedelman: Thanks, Duncan. Product sales decreased $11.7 million or 24% during the three months ended September 30, 2023, as compared to the same period in 2022. This decrease was driven by an industry-wide decrease in unit volumes, a decrease in net revenue per unit and a decrease in the conversion of certain independent dealer consignment arrangements to financing arrangements and other market factors. For the three months ended September 30, 2023, our net revenue per unit sold decreased 1.6% to $63,600. Consumer and MHP loans interest income increased to $8.8 million or 25.7% during the three months ended September 30, 2023, as compared to the same period in 2022. This increase was driven by increased balances in the MHP and consumer loan portfolio.

Between September 30, 2023 and September 30, 2022, our MHP note portfolio increased by $47.8 million, and our consumer loan portfolio increased by $16.8 million. This is net of principal payments and loan loss allowances. This does not include floor plan financing or development loans. Other revenue primarily consists of contract deposit forfeitures, dealer finance fees and commercial lease rents, and increased to $4.1 million or 150.8% in the third quarter of 2023 compared to the third quarter of 2022. This increase was primarily due to an increase in forfeited deposits and an increase in floor plan financing fees. The cost of product sales decreased $8.7 million or 25.9% during the three months ended September 30, 2023, as compared to the same period in 2022.

The decrease in costs is primarily related to the decrease in units sold. Product gross margin was 32.9% for the third quarter of 2023, up from 31.9% for the third quarter of 2022. Selling, general and administrative expenses decreased 9.2% during the three months ended September 30, 2023, as compared to the same period in 2022. This decrease was primarily due to a decrease in warranty costs and a decrease in other miscellaneous costs, partially offset by increased legal expenses and an increase in loan loss provision. Net income increased 9.2% to $16.1 million in the third quarter of 2023 compared to the third quarter of 2022. Net income margin was 32.2% for the third quarter of 2023, up from 25.7% for the third quarter of 2022. We ended the quarter with $0.5 million in cash and $13.0 million drawn on our line of credit.

On July 28, 2023, we closed a new revolving credit facility with Prosperity Bank. The facility is for $50 million with a $25 million accordion feature. It is secured by our consumer loan portfolio. Legacy delivered an 18.6% return on shareholders’ equity over the last 12 months. At the end of the third quarter of 2023, Legacy’s book value per basic share outstanding was $17.61, an increase of 18.7% from the same period in 2022.

Duncan Bates: Thanks, Jeff. We’re happy to have you on the team. Let’s start with the market, then I’ll discuss Legacy’s financial performance and provide an update on strategic initiatives. According to Manufactured Housing Institute data, industry home shipments through September of 2023 are down 25.7% year-to-date. However, housing affordability in the U.S. continues to deteriorate and large numbers of potential homebuyers are priced out of the traditional housing market. We held our 2023 Fall Show in Fort Worth in early October. As I mentioned in the press release, the 2023 show was one of the most successful sales events in the company’s history. The show orders extend backlogs at our Texas facilities well into the first quarter of 2024 at a higher production rate than the third quarter of 2023.

Both dealer and part customers ordered homes at the Fall Show. The retail or dealer side of our business is showing signs of life. Foot traffic is up and dealers are selling homes. Although it varies by geography, we believe that most of the destocking issues from early 2023 are largely behind us. The reorder rate is lower than we would like, but inventory carrying costs are also higher. One important data point on the dealer side. Legacy’s consumer finance business closed more loans in October of 2023 than any other month in the company’s history. On the community or park side of the business, sales to community owners and developers remain stable. Like other manufacturers, we have battled delayed shipments due to setup-related issues, discriminatory zoning practices and high interest rates are headwinds for new developments.

We secured a few large park orders with deliveries extending through mid-2024. I’m proud of our team’s performance to date in 2023. Despite a 25.7% decline in industry-wide shipments through September, Legacy’s net income is only down 1.5% year-to-date through the third quarter. We are driving sales and managing expenses effectively. Interest income from 12 months of reinvesting our profits back into the loan portfolios drove a meaningful portion of the year-to-date profits as product sales declined in 2023. At September 30, 2023, over 99.3% of MHP notes and 98.5% of our consumer loans are current or less than 30 days without payment. We monitor these numbers closely and are confident in the strength of our loan portfolios. I received positive feedback from the last call about discussing projects that the team is working on.

Here’s where I’m focused. Hiring. We made a big — we’re making a big push to hire young, hungry individuals that are committed to a career at Legacy. Our team is lean, aging and possesses a tremendous amount of industry knowledge. Our goal is to create a path for motivated individuals to harness this information in advance within the company. Number two, working capital. Our working capital is too high. We have too much raw material and finished goods inventory. We are working to reduce inventory and free up capital that can be reinvested back into the business. Third, Georgia sales. The Texas plants are in good shape from a sales standpoint. Our team in Georgia has done a great job with product quality and we are now building the highest quality homes that have come out of the Eatonton plant.

Now we need to accelerate sales. Most of the sales team is new and learning. Kenny and I have been heavily involved and we are starting to see results. We need to keep the hammer down though. Number four, workforce housing. We have 40-plus floor plans and have not historically made a push in this space. We continue to bid on large projects with well-known disaster relief service providers. Legacy has the balance sheet to hold and lease large amounts of inventory. It’s too early to discuss specific projects and numbers, but I continue to believe the workforce housing is a huge opportunity for Legacy. Number five, land development. We hired a dedicated team to prioritize and accelerate land development. Completing Phase 1 of Del Valle or Bastrop County outside of Austin is our top priority.

Water and electricity are in, road construction and construction of the water treatment plant began in November. Delaying construction at several properties may have helped us. For example, some properties were in very rural areas when purchased. Now five-plus years later, there are plans to run city sewer and other services that will increase value and provide flexibility. We continue to evaluate ways to maximize the value of these projects for our shareholders. In addition to these internal projects, we are consistently evaluating inorganic growth opportunities. The new bank line gives us the flexibility to pursue these opportunities if they hit our return threshold. One final thought on valuation. We are growing book value or shareholders’ equity at about 19% a year.

Legacy was started with $700,000, and we have grown that equity to $429.5 million in 18 years, make it, save it, invest it again and again. Our book value primarily consists of finance notes at par with the reserve, inventory at cost and land developments at cost. Our facilities and equipment are mostly depreciated. We believe that our book value is conservatively stated and is near the company’s liquidation value. We publish our book value per share each quarter. As of September 30, 2023, our book value per share was $17.61. That number is a month-and-a-half stale and our stock is trading in the $19 range. It’s not much of a premium. If the stock trades at or below book value per share, we will use the full extent of our balance sheet to repurchase shares.

I believe that we can continue growing shareholders’ equity at 18% to 19% a year in this high interest rate environment and that our share price will begin to reflect this. If you do the math, the numbers get large quickly. Any strategic moves are icing on the cake. Operator, this concludes our prepared remarks. Please begin the Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Mark Smith with Lake Street. Your line is open.

Mark Smith: Hi, guys. Duncan, first, I wanted to dig into gross profit margin just a little bit more, really solid execution there. Can you talk about any additional drivers there, maybe what you saw? Has inflationary pressures gone down? What you’re looking at for labor? Any insights there would be great.

Duncan Bates: Yes, sure. Hey, Mark. So, a couple of thoughts for you. Obviously, volume was down pretty significantly in the third quarter. So, managing expenses is extremely important. We’ve been able to hold price even at lower volumes and material prices have come down. Labor and overhead, on the other side of things, have continued to go up. And they’re not accelerating at a quick rate, but it certainly has had an impact on gross margin. I would expect as we ramp up production and continue to manage our costs, that we can — we’re trying to hold these margins where they are, but obviously, managing inventory as well as labor.

Mark Smith: Okay. And then, solid performance on the consumer finance loan business. Did you guys use rate there at all to kind of help drive that? It looks like maybe we saw rates down a little bit. Any discussion around that?

Duncan Bates: Yes. We’re — I think our rates across the loan portfolios have been pretty attractive and certainly helped us drive sales. We are taking rates up a little bit on the consumer loan portfolio, but we’ve not — those won’t be included in the third quarter numbers. So, I think we’ve got an opportunity to pick rates up a little bit here to get back in line with the market.

Mark Smith: Okay. And then any — you guys have done a good job kind of managing charge-offs and any issues within the portfolio. Any changes in kind of your underwriting policies? Or is everything kind of stayed the same there?

Duncan Bates: They’ve stayed the same. I feel pretty good about our underwriting processes. We have added additional collections personnel to the team just in the event that you did start to see some cracks in the loan portfolios. But we’re keeping an eye on it, and we make a lot of calls. We monitor it closely. And we’ve continued to perform with managing those portfolios.

Mark Smith: Okay, great. Thank you.

Duncan Bates: Thanks, Mark.

Operator: One moment for our next question. Our next question comes from Alex Rygiel with B. Riley Securities. Your line is open.

Alex Rygiel: Thank you. Nice quarter, Duncan and team.

Duncan Bates: Hey, Alex.

Alex Rygiel: Nice quarter there. A couple of quick questions here. First, you’ve been holding your average selling price at a nice level here. Any reason for that to change sort of over the intermediate term?

Duncan Bates: No. We plan to continue to hold it. I think the one thing that has changed. Remember last quarter, we saw a pretty significant drop in average selling price quarter-over-quarter. I think that’s stabilized and it stabilized toward kind of smaller, less optioned homes. But I feel pretty good about where it is now. I don’t think we’ll see another major drop. But as far as pricing goes, I mean, we’re now ramping up production at both of the Texas plants. We’ve got a nice backlog well into the first quarter. And so, I don’t plan to see any price degradation into 2024.

Alex Rygiel: And then, you’ve been talking about larger kind of commercial customer orders, and that’s super exciting. Kind of two questions. I suspect it’s a little bit different of a product, but can you talk about that as it relates to average selling price and margin — kind of at the end of the day, the margin on that product? And is there any risk that it’s a different margin and creates a headwind?

Duncan Bates: Yes. So, we’re still in the early stages of this. And all of this came about by obviously, orders were pretty slow through the year, and Kenny and I hit the road and have been meeting with as many people as we can to sell all the product that we can. And we’ve actually — we’ve got — we build this product already, Alex. So — but we’re typically selling it to dealers in South Texas and in West Texas who have relationships with mainly oilfield services companies to house their workers. And so for us, it’s always been four homes here, 10 homes there, and never a focus from a direct sales standpoint. But as we dug in, I mean, there’s a lot of these projects. And we’re primarily competing against a different product.

It’s skid mounted metal product. It’s more expensive to manufacturers. So, I think from a price standpoint, we’re pretty competitive. The margins on that product look similar to our other products. I mean it’s just — it’s essentially large single wides with individual studio-type apartments with or without kitchenettes and all with bathrooms. And so, it’s something that we’re — we have experienced building. It’s not built to a different code or anything like that, that would significantly increase the price. But really, the interesting thing to us is a lot of this product is leased. And from what we can tell, the lease terms are pretty attractive on larger products. And so, it’s still — it’s a little early. I want to get contracts signed on a couple of things before we talk about it.

But I think there is a large opportunity, and I think it does help diversify the business as well as potentially growing the recurring revenue side of our business.

Alex Rygiel: Helpful. And then lastly, as it relates to community development, obviously, Del Valle is your most attractive kind of near term. Can you help us to understand when homes might get delivered to that site? And then, as it relates to other real estate that you own, any opportunities to sell these land assets and redeploy that capital into a share buyback?

Duncan Bates: Yes. Well, I’m putting them in three buckets. I think that there is a bucket for — that makes sense to sell. There are some properties that are just raw land where we haven’t made a lot of progress, and they’re smaller, may be not suited for a development or there’s some reason why they’re cost prohibitive. So I think on those, we can sell them when we feel like the market is right and make a nice return. There’s a second bucket, and I mentioned this on the call, where — since these projects have taken a long time, there have been developments. And so, we’ve got a situation where we’re seeing the area that this was in grow pretty significantly and their city sewer and water coming in the near term. And so, I think that, that bucket are — we’ll have to look at hard on what’s the best use of these projects.